Tuesday, December 11, 2007

How is housing different from other consumer goods

Daniel Weintraub, a columnist at the Sacramento Bee, seems to think housing isn't different from other goods:

"It is great news when the price of energy, food, transportation, health care and consumer electronics drops. But for some reason it is bad news when the price of shelter drops. . . . Shouldn't we be seeing stories filled with anecdotes about formerly priced-out middle-income families finally getting their chance at the American Dream?"

Weintraub is dead wrong. Housing (specifically, home ownership), is fundamentally different from energy, food, transportation, and electronics for three reasons:

First of all, unlike all of the other goods Weintraub mentions, housing is an appreciating durable good. Not only is designed to last a while, but consumers expect it to go up in value, as opposed to a car or a computer, which depreciate rapidly.

Secondly, consumers are both buyers and sellers of housing, whereas for the most part they are only buyers of the other goods mentioned above. While buying volume is greater than selling volume because of new home construction, and while there is a relatively small volume in used cars and electronic, the differences are still enourmous. Housing in this way is more like a stock investment than it is buying a car or food.

Finally, housing is really the only case where the average American can invest at significant leverage. Unlike corporations, which can borrow significant amounts of money for capital investments, the average American can not borrow without assets. In the case of a new homeowner, however, the new home is the collateral. This allows the homeowner to invest in a house when he or she only has the enough cash for 10% or 20% of the total value of the house. The homeowner gets to repay the mortgage over time, while capturing the upside as the value of the house increases. This is in stark contrast to other goods, where price increases only hurt the consumer.

As a result, housing price increases are vastly different from price increases in other consumer goods, because housing is a durable, often leveraged investment for the consumer, as opposed to a short or medium term purchase.